For continued growth and development of financial assets, companies utilize credit research systems to determine the applicable securities to invest in for the company. Cash investment credit research processes addresses short term securities distinguishing versus longer term bonds, that are usually less than a year in maturity, fixed income instruments. Credit research systems evaluate credit ratings for securities that a company then utilizes for determining what to invest in, and how much to invest.
For any security to invest in, the pricing of the security and the yield of the security are highly dependent on the credit quality of the issuer of the security. As such, an issuer of a security with a lower credit quality rating, i.e., a higher risk, equates to the security having a higher return due to the higher risk involved. Companies utilize this information to invest more or less in different securities.
When at all possible, goals for investments on a security for a company include lowering risk and increasing return. With respect to the credit rating of an issuer of a security, 1 or 2 basis points may be a huge differentiator.
Currently there is no mechanism to assess objectively the performance of a credit rating system at the aggregate, sector, and/or analyst levels. A robust credit rating process is a prerequisite for providing high risk adjusted returns to investors and ensuring capital preservation. Currently there are no metrics in place to measure a rating effectiveness. No formal process exists to monitor the timing and sequence of internal ratings, agency ratings, and market reaction to those ratings.
Therefore, there exists a need in the art for a system and method that quantifies the value added by a cash investment credit research agency.